The role of financial markets on agricultural commodity markets has been controversially discussed both in academic and political arenas. Some economists argue that price changes were primarily caused by changes in fundamentals such as increased demand for biofuels and simultaneously occurring crop failures. Other market observers claim that “excessive” speculation with index funds coupled with herd behavior by market participants has driven world commodity prices away from levels justified by fundamentals, generating speculative bubbles and increased price volatility in commodities critical for food security, thus hurting the poorest consumers. The particular area of concern is the speculation in derivatives based on food commodities. As a response, they call for tighter regulation of the financial institutions to correct for market imperfections and failures that produce suboptimum outcomes and distort consumer choice. Meanwhile a comprehensive package of regulatory elements (e.g., MIFID II agreement) has been proposed. These initiatives aim on improving transparency, regulating over the counter trade, installing position limits and strengthening regulatory authorities. The empirical evaluation of such tools is ambiguous. The reform has been criticized because of broad exemptions and marginally addressed restrictions on certain trading strategies.
This task provides an assessment of existing and recommended regulations that affect commodity derivative markets. Specifically: is increased transparency always good? Which regulatory instruments should be implemented? Should commodity futures markets be separately regulated or regulated together with other financial markets? Do financial markets regulations provide effective price stabilization that indirectly protects consumers? The availability of empirical price data plays a pivotal role. We will utilize commodities information sources for both financial and physical markets at numerous temporal and spatial scales, building upon experience in financial bubble testing, to estimate the influence of different regulation scenarios on food prices.